Follow by Email

Sunday, June 25, 2017

Greek Mytilineos Group A Better Risk Than Greece?

The announcement that the Mytilineos Group successfully placed a 300 MEUR 5-year bond at a 3,1% yield caught my attention for a number of reasons.

For starters, Mytilineos' yield of 3,1% is substantially below the current yield on Greek sovereign bonds in the secondary market (5%+). That is the first time in my experience that I see a national borrower issuing debt in international markets at a lower yield than that of the sovereign. One of the general rules about country lending which I had learned over the years was that no national borrower, private or public, could raise debt at lower yields than the sovereign. The reason for that is the so-called 'country risk'. Country risk is the sum of many components, one of which is that within the national borders, it is the national jurisdiction which counts. Theoretically, a sovereign could any time of the day declare a moratorium on all foreign payments. If that happened, even a AAA-rated borrower in that country, flush with liquidity, could not service his foreign debt.

After browsing Mytilineos' website (the first time ever; I had not been familiar with this group), I saw that this group is internationally diverse with operations in several foreign countries. That could be part of the explanation. If the bond is secured by foreign assets or foreign revenues or whatever else is outside the jurisdiction of Greece, that could explain the below-sovereign yield. But then a couple of other observations came up (which I have to hedge by emphasizing that they are based on a very cursory review only and without any other knowledge about the Mytilineos Group).

This is not a large group by international standards with group sales just below 1,3 BEUR. Certainly not the kind of group which one could expect to be an important player in international capital markets attracting the very best conditions. A cursory glance at the group's P+L and balance sheet suggests the following:

* the most obvious financial strengths of the group are (a) very high cash flows (roughly 20% of sales); (b) a rather decent profitability (ROS of 5%+); and (c) almost 200 MEUR in cash on hand.
* with current assets exceeding current liabilities, the group's liquidity would appear fine.
* with equity representing about 40% of total assets, the balance sheet structure would appear to be stable.

However, there are some items which, at first glance and in the absence of more information about the group, could be considered 'scary':

* consolidated total assets include (a) 209 MEUR goodwill; (b) 243 MEUR intangible assets; and (c) 257 MEUR in own stock, or a combined total of 709 MEUR. This means that about 60% of the group's equity of 1.284 MEUR are invested in what cynical credit risk officers would call 'hot-air-assets'.
* the group has almost 800 MEUR in trade and other receivables. That reflects extremely unfavorable trading terms and possibly includes substantial risk.
* total group debt of 650 MEUR appears rather high even for a capital intensive industry.

In summary, the 3,1% yield raises more questions in my mind than it provides answers. Obviously, the immediate reaction is that the low yield (for Greek risk) is due to the group's outstanding creditworthiness and reflects investors' belief that Greece as a country is on the rebound.

Or it could be, as mentioned at the outset, that the bond is secured with foreign revenues or assets.

Or - one could be a bit suspicious. A very important element is not known in this matter, namely: who purchased the 300 MEUR bonds? Suppose it were the Mytilineos family itself. 3,1% on 300 MEUR is close to 10 MEUR per year. If the Mytilineos family had purchased these bonds, they would have arranged for an annual transfer out of Greece of close to 10 MEUR, and that in the presence of capital controls which would normally impede such a thing. Shamed be he who thinks such a thing!

FYI - MG is an uber conservative group, with conservative management and as solid as a rock. Instead of you diplaying your usual naval tactics in the lake of Zurich battle for world domination, I would urge you to buy some shares of Mytilineos and earn some profits which might change your outlook as what hidden gem MG is.

I forgot the part of you being a preditory investor seeking slaves in East Europe and being uber impressed with how much more easily manipulated than the tax dodging Greeks. So, here is what the group is in your language:

Perhaps the mystery of a private group not being able to borrow at rates below the sovereign debt could be explained when we look at the 7-Yr bond yield for Greece which is an eye-popping 1.5% (it has dropped during thr last month from 6%+ range to 1.5% and for a brief time even lower).

https://tradingeconomics.com/gggb7y:ind

I also believe that Greece's exit to markets is through the 7yr bond. Cyprus ( a Greece-like economy but better managed) just returned to markets with a 7-yr issue at 2.31% to replace debt of 4+% or higher.

So here is some MBA talk and I hope others can follow in this blog. So say, MG(Mytilineos Group) is a company that makes 300 Mil. euros before taxes. Currently taxation is high in Greece, so about 50% of MG's profit goes towards the payments of taxes and similar obligations.

So if I were a CEO of the company, I would raise a bond issue in the market like MG just did; the money raised are not subject to taxation. I will then plow the money into expanding my business (new production units) with the view of generating sales in the 2-3 Billion euro range vs. the current 1.4 Bil. This undoubtly will hurt profitability in the short term but in essence MG would be investing those tax euros which would otherwise pay to Tsipras into its own business instead.

So yes, there is an attempt to avoid the crippling taxation regime imposed on Greece by Berlin/Brussels but there is no plan to circumvent capital controls of any kind. It is just a smart business decision and it goes like this: instead of me paying for Tsipras' nonsense of pleasing the Germans let me invest in my own company, an area which I know quite well and let me take advantage of low cost financing to expand my business for the benefit of all involved. Otherwise MG looks like a sitting duck and a cash cow for the government, in other words not a very smart move if you are in business. In business you invest in what you control the most and know best. And when the temperature of taxation is rising, even if you are the proverbial frog sitting in the boiling pot, you make sure you jump out of the pot and go and do something good for yourself in the face of otherwise adverse conditions.

So said, Phoevos the would be CEO of MG. So if you follow me this has nothing to do with capital controls. It's a pure case of getting tax-free financing (plus a nice debt expense reduction for you bottom line taxable profits), investing the the new capital in the area of your expertise and depriving the government from sharing in profits that the government has not created. In other words, pure capitalism of the healthiest kind.

I didn't look into the notes which probably explain the "stock". I assumed it was own stock because that's what it normally is when the term 'stock' is used. For shares held in other companies as investments, the term 'cash and securities' is normally used.

I just checked Bloomberg. Mytilineos has a market cap of 950 MEUR. That is very, very small for a company which makes such (positive) headlines about its shares. 60% of 950 MEUR would be 470 MEUR (assuming that the Mytilineos family, directly or indirectly, only owns 40%, which I doubt). So all the international fuss about a cake the size of 470 MEUR?

The fuss is about access to markets by Greek companies which somehow was falsly tied to the memoranda of the Greek state with its clownish lenders. MG is by choice an agile gazelle type of company and needs not grow to become a feeder company for tax revenue to an undeserving state.

Forget about trying to understand MG because this bird has flown. You had a chance of more than doubling your money BEFORE the company decided to translate its solid reputation to ambitious expansion plans. During the expansion period the stock price will suffer so there is no need for you to try understanding in retrospect a company which you should have known about way in advance.

I thought that this blog was about observing Greece and not act as some kind of an amateur stock picking club recommending a new investment.

There is nothing to be understood about Mytilineos other than its independent existence; independent from a subjugated state that is which is none of me concern to begin with because Greeks by definition are not statists and don't give a damn about the effing rotten state which is now owned by germany.

In answering your question, indeed Mytilineos is a far better risk than Greece because it's a consistently profitable company with a proven record and I would rather lend MG instead of Greece which as a company fails all tests of profitability.

As far as Greece is concerned, there is a specifically tasked group called PDMA - Public Debt Management Agency whose purpose is to undertake the financing needs of the state:

http://www.pdma.gr/en/agency-pdma/purpose

Rumor on the street is that PDMA, following the Cypriot model, will attempt to roll over debt maturing in 2019 into a new debt issuance of about 3 Billion euros for a 3-7 year duration (it remains to be seen as to how long the maturity will be).

Just like in the Greek case, the new 7-yr Cyprus bonds replaced old bonds that were not part of Draghi's QE. So both Cyprus slightly below 3% new debt and the Mytilineos 3.1% new debt have basically set up favorable conditions for Greece to do the same on a small scale.

And to remind readers this is done to replace the Samaras issue (which had heralded return to the markets) which however had punitive rates of 5% or whereabouts when ND attempted to return to markets(but failed to do so in a beneficial way due to a competing Portuguese bond issue offered at the same time) with the now infamous "success story". Well, it was nothing close to a success story and now the new government will attempt to score a better deal to replace the Samaras deal of 2014 which matures in 2019 anyway and as a result ladies and gentlemen expect political fireworks and uber hypocrisy to fill the air until this new attempt is settled.

Who said that the low quality Greek politics (because our politicians don't have a clue what a maturity and debt rollover is, among other things) are not full of drama and emotion like an effing soap opera for day-time TV.

As I pointed out in my article, when I wrote it I had exactly zero information about the Mytilineos Group. In fact, I had never even heard about it. Since then, I have researched Mytilineos quite a bit and I have watched a couple of Bloomberg interviews with Evangelos Mytilineos. The man is obviously in a league all by himself, speaking British English without a trace of an accent.

I think I now have a pretty good idea as to who Mytilineos is and what that family represents. They remind me a bit of the old days in Central Europe when you had cement barons, steel barons, auto barons, etc. Typically, those were names where that name was a bond in and by itself. They had amassed huge fortunes within a few generations and yet, there were not financial investors and/or greedy. They were loyal to employees and employees were loyal to them. I have no doubt about the fact that Mytilineos has a huge fortune and that he would use that fortune to support his companies if that ever became necessary.

In the mindset of a credit risk manager, all of the above are so-called 'soft facts'.

Since I did not have the soft facts when I wrote the article, I could analyze only the 'hard facts'. The times when credit risk managers could approve risks on the basis of soft facts are over. They can only include soft facts as a small element of the total rating. All they look at are the brutal hard facts.

The quantitative rating of the Mytilineos Group (that is the rating which the computer spits out after one has input the numbers) would either be quite high or very low, depending on how one treats the intangibles. Credit risk managers initially tend to treat intangibles as a deduction from equity. In the case of Mytilineos, they would analyze the intangibles in great deal to see whether they can attach value to them.

Half a year's of receivables would initially scare any risk manager. These receivables would have to be analyzed in great detail as regards past-dues and/or risks of losses. And then there is the bank debt. Bank debt in the amount of over half a year's sales is very, very high, particularly when there are very high other liabilities. That would give a risk manager something to chew on for a while.

In summary, I now understand why Mytilineos is in high regard by markets and lenders. Quality seems to rank very high as a value. I never suggested that they would cheat. All I suggested was that there are ways to extract money from a country even if there are capital controls. One of these ways is to lend - via a bank - part of your own offshore money to the Greek company and collect the interest.

When I lived in Argentina in the 1980s, many large companies had large loans from offshore banks, something very unusual at a time when Argentina was close to default. In actual fact, they were pass-through loans. The companies' owners used their offshore liquidity not to invest in or lend to their Argentine companies directly. Instead, they passed their money through a bank so that from the Argentine side it looked like bank loans. The thought behind this was that if there were ever any trouble like a default, bank loans would be treated better than shareholder loans. A correct thought, by the way. And, of course, they could get money out of Argentina by way of interest.

What I know about Mytilineos is their stated intent to raise circa 800 Mil. in new debt to expand their business and raise their volume of production. So this new issue is only Phase I of the new debt effort. There will be more for sure.

And following in the heels of Mytilineos here comes ELPE (Hellenic Petroleum) with another 200 Mil. new bond at 3.5%.

The reason all of this is significant is that it shows how hollow the Greek opposition of ND has been in suggesting that there is no access to markets for Greek companies and that somehow this is the fault of the government. In other words, nonsense which when addressed to a financially illiterate audience such as the typical Greek citizen, it does more harm but is full of lies.

The other part where the opposition has spectacularly failed in its propaganda is in its manufactured position that if the government had agreed to Berlin's demands earlier this would have meant access by Greek banks to Draghi's QE. As it turns out Draghi can not include Greece in QE operations based on the lack of definition of its debt relief. And the lack of definition on debt relief is squarely on Germany which refuses to adequately define and has also rendered the IMF in a position of "pretend" participation.

ND, this incompetent political Greek opposition party, spent months spreading the rumor that capitulating to Berlin earlier would have meant tangible QE dividents for Greece. A total lie. And now that everyone knows the truth no one from ND comes back to mop-up the damage created by their lies but instead the same lie is hanging out there because most of the Greek citizens don't have a clue and little desire to follow such issues in depth.

And this is why ND happens to be the most anti-Greek political party. Not only they promote german positions shamelessly through blatant lies but they also escape unscathed because Greece has no press capable of unmasking their propaganda and fabricated lies spun on a daily basis.

In this blog some older references were about Greek elites in politics, history, thought,about experiences and economy,not specifically in that order.Elites in every area and in economy give the example of leadership because usually, dealing with responsibility in difficult times for a short term period is very damaging, but for a longer term, is admirable not only as an economic value.

However,even if the best principles were to be followed, most people usually won't understand the commitment.

Gustave Flaubert the "Madame Bovary" novelist was saying:

"Stupidity lies in wanting to draw conclusions".

I have the sense that the article from Klaus was written to be questioned-to be challenged, not to draw conclusions and my comments also, but to be seen and under the aspect of leadership and responsibility.

But which part do you wish to question? For a number of months now the false narrative by both Brussels/Berlin and the Greek opposition has been offered that Greece is trapped and unable to return to markets. And here we have an example of a Greek company borrowing at an attractive borrowing rate and therefore free to pick and choose the best deal markets could offer.

So, when you deal with blatant lies what is the purpose of examining and questionning the lies when you already know that you are dealing with lies? The examination and questionnin would only make sense if you didn't know that a lie was involved and you embarked on a journey for discovering the truth.

@ kleingut.I am still not sure your herd will move, but you certainly have more experience with those matters than I do. Should it be so, it is still not the solution to Greece's problems, she has repeatedly proven that she can/will not make prudent use of money inflows. Your herd is financial investors, the type you worn against in your article. they will invest in the hope of (short term) gains, they have no intention of creating value, only to distribute it. They usually claim not to like instability, not so, they could not live without it. They can, and will, pull out of their investments within seconds, with gains or losses.

The investors Greece need are not amongst your herd animals, they are the ones that would create value (products). Their goal is also to make a profit, but by producing, that Greece will share in that profit by getting work places, taxes, technology transfer and human skills is something they accept. Once they have calculated their first costs and operating profits they will know when they can expect to break even, and know that should they pull out their investments before that time most of them will be lost. They need stability (political) at least for that period. Political stability also means that future governments honor agreements made by previous ones.Even a rather low tech plant like an automobile assembly factory requires planning, feasibility study, permissions, design, construction, in-house training, commissioning and pre-production and finally full production. In a functioning nation the time frame from first invested EUR to break even might be 10 years. Any Project Manager who would attempt to give a qualified time for the period in Greece would be met with head shaking from his Steering Committee. Lennard

Of course the herd are the financial investors and, of course, they are not the solution for Greece. In fact, with the free flow of capital, financial investors can cause very significant damage when they race for the exit door.

I still expect the decline in yields because a 5%+ yield on Greek bonds which are essentially Eurobonds is just outrageously high. With the recent review completed, one can assume that Greece will be 'safe' for a few years. And Greece current debt profile is such that any bond with a tenor of 3-5 years (perhaps even more) matures in times when Greece does not have significant other debt maturities. And nobody is going to let Greece default because there may not be enough money for interest.

So we are likely so see some of the traditional money flows into Greece. The water level in the bath tub will rise and everything else that's swimming in the water will rise with it. When the tide comes in, you don't see the bathing suits people are wearing. But, as Warren Buffett once said: when the tide goes out, you see who is naked.

But as you might guess: I am completely on your side as regards the kind of foreign investments which Greece needs and I have written endlessly about it.

We don't want companies in Greece which feed a rotten state which is under the thumb of Berlin. We want all Greek companies to hide their assets from the claws of an occupied state and only participate in the reconstruction of our country after the Berlin enemy is defeated. All Greeks have only one duty: total resistance to the nonsense of Brussels and Berlin.

Freedom or death is our motto and by God we will see all of our occupiers dead before long. Just wait and watch.

You very well know that average and naive german folk which occupies Greek beaches, obsessed with little things like "how close to the swimming pool I can get a beach chair because I am german and I deserve it" has very little to do with the Brussels/Berlin occupier class. Germany the state is our enemy, not the uninteresting Germans which after all they may live whether on Greek beaches or elsewhere. As for the myth that cheap germans leave any money in Greek vacations, I am very much afraid that all official statistics will leave you disappointed. They are nothing more than a bunch of freeloaders taking up space we could best offer to Chinese, Americans, Canadian Australian, French and U.K. tourists who pay almost double than then uber cheap germans.

@ Phoevos.Indeed, freedom or death. But Greece picked none of them, her choice was money, and that is not compatible with freedom. As for your prophesy of the imminent demise of the German state, forgive me my lack of interest, I am an old man and may not live to see it.Why does Greece always pick fights she cannot win? She stubbornly seek to inflict larger losses on her enemy than she sustain, and then declare it a victory. She ignore that her enemy is able to absorb its losses, while she can ill afford it. I think there is a Greek word for it, can you help me with it?Lennard

@Lennard:When Phoevos breathes fire and brimstone it is just his way of expressing his utter helplessness. Clueless and helpless as he is he tries to find comfort in an endless repetition of empty threats and prophecies of doom. It is absurd and boring at the same time and it sends out a very sad message regarding the state of mind of some Greeks.Urs

If what felt like a she is indeed a he, he may have lost his former anger venting space on the web. Meaning the venom and spite has been cultivated for quite some time now. Suddenly feels familiar anyway. Besides just as he dominates the comment section here, he seemed to dominate the other comment space, he dominates this one now. Maybe that's why he comes to mind.

Although on Twitter it looks as if Dean Admittedly his ramblings here brought more the Erinyes. That's why I for whatever reason assumed he was female.

https://twitter.com/Phoevos/status/875159060709908480

thankfully I am old too.

Comment by one of the freeloading cheap Germans and as voter responsible for the equally freeloading, I suppose, German state.

I guess you german folk dislike peoples who aspire to freedom. You want slaves to suck up to your statism delusions; right? And you want to befriend only those who tell you that effing germany has a great future when in fact its future is not in its own hands because to put it simply it is at the mercy of others. So you get irritated when one points the obvious which is that your Kaiser has no clothes and you want the most dissimilar economy in Europe to yours (such as Greece) to immediately try to imitate you because you are going down the tubes and apparently our fate is to go down with you. Who tells you such things? And yhy are you so prone to idiocy?

For those of you interested in the meaning of Phoevos name, here is what it means according to the Kabaralian philosophy and in my case it's pretty much true with some variations of course for individuality:

1. Your name of Phoevos gives you the desire for success and financial accumulation and the confidence and drive to go after your ambitions, regardless of obstacles.

2. Your thinking revolves around business and ways of making money, rather than on music, art, drama, or philosophy.

3. You start new endeavours and incorporate new ideas, but seldom if ever receive the full benefits and financial accumulation for your efforts.

4. You tend to feel very frustrated in being unable to realize your ambitions fully.

5. An extremely independent and self-sufficient person, you dislike taking orders or advice from anyone.

6. You believe in speaking directly and to the point, so you are candid and abrupt.

7. Many friendships are lost because of your directness.

8. Those in close association complain that you are not inclined to observe and return acts of kindness, compassion, or affection.

9. You would be a firm parent and your children would be well-disciplined, but you would find it difficult to get close to them and to show compassion and affection.

As for Germany dear Lennard take it from the pros if you don't believe me:

@ Urs.Yes, Phoevos can be rather annoying to listen to, but it is still useful, he expresses the opinions of many Greeks, the opinions they don't tell you to your face. It may not make you understand why, but it can make them more predictable to you, how they tick, what buttons to press.Lennard

I wouldn't put it this way. As a general rule, we Greeks don't know what we want because if don't then our enemies don't know either what we want and therefore they can not block us from having it. There is also the added benefit is that if we "don't know what we want" then we can not be traitors to our country, like for an example an Austrian who knows exactly what his country wants and volunteers to tell us (at that point we can do some serious harm to Austria). We grumble continuously,; nothing is satisfactory but yet again this is a nice method of passing information to each other without risking imprisonment or death (because we all grumble, therefore we are all guilty of the crime of being never satisfied and we can not be persecuted for such). This is where you foreigners fall into the trap. You hear Greeks complain about this, that and the other and you say "let's help these people fix it". But that's the thing: you can't fix it otherwise we lose this important protection of not displaying what our true intentions are and we become conquerable. And if we become conquerable then our fate is assimilation and extinction. The point is this: after thousands of years we are still here, we speak a language that is hard for a foreigner to understand and we don't want to have a Kratos (in other words an oppressive state to dominate us which some of you gentlemen consider being the utmost good (a well-run state). That's why I have tried to warn you many times that you are wasting your time with us because whatever the cost we are determined to outlast you. This is our survival kit and has worked fine with the Romans, Byzantines and the Turks. Compare to them Germans, Austrians and the like are simple footnotes - we know for sure how to outlast you.

So the bottom line question here is what exactly are you observing? we will never be clear as to what we really want; you will never understand what we really want and therefore you would be unable to give it to us. All you are going to get in the end is a lesson which I am not sure is applicable to your circumstances and daily lives.

Each Greek you speak to has many different opinions, none of which expose the core of our existence. They are a form of making conversation, or part of humanity if you wish.

None of our political parties are focused on our eternal strategy; they are only concerned about social trends and economics which are the most anti-Greek things because by definition Greeks are interested in the eternal and not the contemporary.

Self-destructive behavior permeates modern Greek society in all areas. Just watch the traffic, Greeks will happily place themselves in mortal danger when they drive, in order to "win" over a perceived "enemy". You can find shrines along the roads commemorating the victors.Or look at the way they destroy their nature.(Self)destructive behavior has no space for creativity or innovation.Thanatos.

At least Pyrrhus knew his enemies and he fought against them as best as he could eventhough today we deal with this roman monstrosity called the EU which is 1000 worse than Rome. Imagine how much better we will be if Rome was defeated and extinguished as it should have.